Getting What You Pay For

When I say that it “works,” I don’t mean that it necessarily produces positive outcomes. I mean that it produces the outcomes that its internal logic would predict. In a short caricature: if you offer more money for a product or job, you will get a better item or employee.

There are many caveats, but anyone who believes in rational, self-interested economic actors should agree that there is correlation between the salary of workers and the quality of candidates for a position. Better candidates should result in the selection of a better person to take up the job.

That should all be pretty clear. It raises an important question, though: what outcome do policymakers expect when they reduce the compensation of public employees? They usually claim that there will be little to no effect on services–or, more likely, they ignore the point entirely.

This simply does not make sense. Unless the government has a monopoly on the purchase of labor (very difficult to achieve and maintain), this will provide a disincentive to working for the government, reducing the size and quality of the talent pool available. There will still be excellent teachers, police, and administrators, but reduced compensation will tend to drive at least some of the best candidates into the private sector.

Only a small minority of politicians will be brave (or stupid, or callous) enough to attack, for example, public education as an institution and advocate hiring less qualified and less competent teachers. But plenty of politicians will advocate cutting the salaries of public employees, including teachers. They make these statements with no regard to the implications of their actions — or with the goal of weakening public education. There simply isn’t another explanation. If you believe in markets, then, other things equal, reducing compensation will tend to reduce the quality of the workforce.